THE IMPACT OF LIBERALIZATION ON THE COOPERATIVE MOVEMENT IN KENYA

By

Fredrick O. Wanyama, Ph.D. Senior Lecturer in Political Science,

School of Development and Strategic Studies, Maseno University,

P. O. Box 333 – 40105 Maseno, KENYA.

Fax: +254-057-351221 Tel: +254-722-233479

E-mail: fwanyama@hotmail.com or fwanyama@maseno.ac.ke

A PAPER TO BE PRESENTED AT THE FIRST INTERNATIONAL CIRIEC SOCIAL ECONOMY CONFERENCE ON STRENGTHENING AND BUILDING

COMMUNITIES: THE SOCIAL ECONOMY IN A CHANGING WORLD, OCTOBER 22 – 25, 2007, VICTORIA, BRITISH COLUMBIA,

CANADA.

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ABSTRACT State control over the cooperative movement ended in 1997 following the introduction of liberalization measures with a view to create commercially autonomous member-based cooperatives that would be democratically and professionally managed; self-controlled; and self-reliant. Very little is, however, known about the impact of liberalization on the development of cooperatives in the country. The purpose of this paper is to highlight the current trends on the status, structural organization and performance of cooperatives in Kenya. Field data show that cooperatives in Kenya have survived the market forces and continued to grow in number and membership. The market forces have, however, triggered a structural transformation that has seen the fading away of inefficient federative and apex cooperative organizations as cooperative societies seek better service provision. Similarly, cooperatives are increasingly diversifying their activities in order to respond to their members’ needs. The well-adapted cooperatives are subsequently recording better performance than they did in the era of state control. INTRODUCTION1

Cooperative development in Africa has generally traversed two main eras: the era of state

control and that of liberalization. The first era saw the origin and substantial growth of

cooperatives on the continent under state direction. Originating from government policy

and directives rather than people’s common interests and own motivation, these

organizations were conditioned to emerge as dependent agents and/or clients of the state

and other semi-public agencies in many countries, particularly the Anglophone ones like

Kenya. By serving as instruments for implementing government socio-economic policies,

cooperatives in many countries more or less served the interests of the state than the

ordinary members and the general public. These institutions were subsequently engulfed

into state politics to the extent that the failures of state policies found expression in the

cooperative movement. This partly explains why reports on the failure of cooperatives,

1 A more detailed version of this paper is forthcoming under the title “The Qualitative and Quantitative Growth of the Cooperative Movement in Kenya”, in P. Develtere, I. Pollet and F. Wanyama (eds.), Cooperating out of Poverty: The Renaissance of the African Cooperative Movement, Geneva: ILO and Washington: The World Bank Institute.

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just like the state, to meet their developmental expectations during this era abound in the

literature.

It is such failures that partly triggered calls for a change in cooperative development in

the early 1990s. Two authoritative World Bank studies on cooperatives in Africa (Hussi

et al, 1993; Porvali, 1993), for example, acknowledged the potential role that

cooperatives could play in the development process, but only if they were restructured

and disentangled from the state so as to be run on business principles. The implication,

therefore, was that state control was stifling the performance of cooperatives and their

potential contribution to development could only be realized if they operated according to

market principles. This thinking during the liberalization of the economy in most African

countries saw cooperative development enter the second era. Consistent with the new

economic environment that was sweeping across Africa in the 1990s, many countries

introduced new policies and legislations ostensibly to liberalize the cooperative sector as

well. The main content of the resultant framework was to facilitate the creation of

commercially autonomous and member-based cooperative organizations that would be

democratically and professionally managed, self-controlled and self-reliant.

Whereas cooperative development in Africa during the first era is well documented in the

existing literature, the second era of cooperative development seems not to have been

adequately researched. It is about a decade since the introduction of liberalization

measures in African cooperatives, yet very little is known about their impact on

cooperative development despite the continuing debate in favor of cooperatives as the

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most suitable form of organization for poverty alleviation (Birchall, 2003; 2004). There

are only a few studies in some countries that focus on disparate sectors of the cooperative

movement rather than providing comprehensive accounts that inform the current status

and functioning of the cooperatives since the liberalization of the sector. In Kenya, the

few said studies have only focused on savings and credit (Evans, 2002); agriculture (ICA,

2002); and dairy production (Delgado et al, 1997; Staal et al, 1997; Owango et al, 1998).

In the circumstances, a number of pertinent questions have gone unanswered since the

mid 1990s. For instance, have cooperatives survived the fierce competition of the market

or they have withered away? What has been the organizational response of cooperatives

to the new economic environment that they suddenly plunged into? Are the cooperatives

performing better than they did in the first era?

The purpose of this paper, therefore, is to respond to these questions by highlighting the

impact of liberalization measures on the status, structural organization and performance

of cooperatives in Kenya. It is based on field data that were collected between November

2005 and January 2006 under the Essential Research for a Cooperative Facility for

Africa study. This study was initiated by the Cooperative Branch of the International

Labor Office (ILO); funded by the Department for International Development (DfID) of

the United Kingdom; and coordinated by the Higher Institute for Labor Studies at the

Katholieke University of Leuven in Belgium2. Being a qualitative rapid assessment study,

2 The purpose of the said study was to obtain qualitative insights into the strengths and weaknesses of the cooperative movement in African countries with a view to assessing the real and potential impact of cooperatives on reduction of poverty through creation of employment; generation of economic activities; enhancement of social protection; and improvement of the voice and representation of vulnerable groups in society. The researchers, one in each of the eleven countries that were sampled, first of all used qualitative rapid assessment methodology to collect data at the national level using semi-structured interviews with key informants in the cooperative sector. This was followed by in-depth interviews with leaders and

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data were collected using unstructured interviews with key informants in the co-operative

sector at the national and society levels.

At the national level, interviews were held in Nairobi with respondents from the office of

the Commissioner of Co-operative Development in the Ministry of Co-operative

Development and Marketing; the Kenya National Federation of Co-operatives (KNFC);

the Co-operative College of Kenya; the Co-operative Bank of Kenya; the Co-operative

Insurance Company of Kenya (CIC); the Kenya Union of Savings and Credit Co-

operatives (KUSCCO); and the Kenya Planters Co-operative Union (KPCU). Officers

from the International Co-operative Alliance (ICA), Regional Office for Africa in Nairobi

were also interviewed. At the society level, two co-operative societies were visited for in-

depth interviews with leaders and members. These were Githunguri Dairy Farmers Co-

operative Society in Kiambu district and Kamukunji Jua Kali Savings and Credit Co-

operative Society in Nairobi. These primary data were supplemented with secondary data

from official records and reports of co-operative organizations and published books and

articles.

It is evident in the paper that though the initial implementation of liberalization measures

resulted into undesirable consequences for cooperatives in the country largely due to the

poor or inadequate preparation of these organizations for the competitive market,

liberalization seem to have served well the interests of cooperative development in

Kenya. This is evidenced by the fact that those cooperative structures that have been

members in selected cooperative societies at the local level with a view to generating case studies to illuminate on the findings from the national level. The eleven countries are Ethiopia, Egypt, Kenya, Uganda, Rwanda, South Africa, Nigeria, Ghana, Niger, Senegal and Cape Verde.

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redundant due to their inability to address the interests of the members are increasingly

being abandoned, while the old cooperatives that have adapted to the new environment

have come out stronger than they were before the liberalization of the sector. To put these

changes in perspective, it would be informative to briefly sketch the organization and

functioning of cooperatives in Kenya before the introduction of liberalization measures.

THE COOPERATIVE MOVEMENT IN KENYA

Co-operatives in Kenya are broadly classified into two main categories namely,

agricultural and non-agricultural. Agricultural co-operatives are mainly involved in the

marketing of produce, an activity that has seen some of them get into the manufacturing

sector through primary processing of produce before they are marketed. These co-

operatives are further organized along the crop or produce that they handle; the key ones

being coffee, cotton, pyrethrum, sugarcane and dairy. In addition to these, there are also

fishery, farm purchase and multi-produce co-operatives in the agricultural sector.

Whereas fishery co-operatives play the role of marketing members’ fish, farm purchase

co-operatives mobilize resources to purchase land for the members.

In the non-agricultural domain, co-operative activities are found in the financial, housing,

insurance, consumer, crafts and transport sectors. In the financial sector, savings and

credit are the predominant activities of co-operatives while co-operatives in the housing

sector have the provision of affordable shelter as their key activity. Consumer and craft

co-operatives market respective commodities for a profit while co-operatives in the

transport sector engage in savings and credit activities. It is important to note here that

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co-operatives are also spreading into the informal sector. There already exist some Jua

Kali (Kiswahili for “hot sun”, in reference to the open air environment of informal

enterprises) co-operative societies that are confined to savings and credit activities.

The co-operative movement in Kenya is further organized into a four-tier vertical

structure that links up co-operative societies at the local level to the national level. The

structure consists of primary societies, co-operative unions, national co-operative

organizations and one apex co-operative organization. Currently, the apex organization is

the Kenya National Federation of Co-operatives (KNFC), whose membership includes

national co-operative organizations as well as some co-operative unions. It is through

KNFC that the Kenyan co-operative movement is expected to be linked to the world co-

operatives movement.

That Kenya has an activity-based co-operative system finds expression in the

organization of national co-operative organizations (NACOs) that are based on specific

types of activities such as banking, insurance, dairy, savings and credit, housing, and

coffee, among others. Currently, NACOs include KUSCCO, CIC, KPCU, the Co-

operative Bank of Kenya, Kenya Co-operative Creameries (KCC), National Co-operative

Housing Union (NACHU), and Kenya Rural Savings and Credit Societies Union

(KERUSSU). Members of these organizations are mainly co-operative unions, but not to

the exclusion of co-operative societies.

Co-operative societies are affiliated to co-operative unions, once again along the

activities or agricultural produce marketed. Consequently, in the agricultural sector, there

are produce-oriented co-operative unions that collect produce from societies for primary

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processing and marketing. These unions also provide to the societies other centralized

services like farm input supply, administration of production credit, accounting, staff

training and member education. In addition to these activity-based unions, there are also

District Co-operative Unions. These are area-based co-operative unions that bring

together societies dealing with different types of activities within a geographical area,

which is an administrative district in this case (Republic of Kenya, 1997a: 13). Most of

these unions are agriculturally based and their role is to provide a range of support

services to their members, which would have otherwise been provided by activity-based

unions.

STATE-CONTROLLED COOPERATIVE DEVELOPMENT IN KENYA

Up to the mid 1990s, a fundamental character of the Kenyan co-operative movement was

its close association with the state to the point of developing a dependent relationship.

This was partly due to the historical evolution of these organizations in the country. It

should be noted that the first co-operatives in Kenya were founded in 1908 during the

colonial era and were molded by the colonial government to serve the interests of the

white settlers who were agitating for more agricultural services from the government.

The colonial government, therefore, allowed the formation of cooperatives as its

instruments for providing services to the white farmers and went on to bar Africans from

participating in these enterprises through strict legislation (Co-operative Bank of Kenya,

1993: 3).

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At independence, the new government also viewed cooperatives as mechanisms for

achieving its ends rather than those of the members. This time round, the state sought to

use co-operatives as instruments for promoting economic development in the country,

especially in the rural areas. It had, therefore, to ensure the emergence of strong, viable

and efficient co-operatives by directing the formation and management of these

organizations from above. This state-controlled promotion of co-operative development

was formalized by the introduction of a single legal framework for all types of co-

operatives in 1966 via The Co-operative Societies Act, Cap. 490.

As per the intensions of the government, the main content of this legal framework was

strict supervision of co-operatives by the state. With the formulation of the Co-operative

Societies Rules in 1969 that stipulated the operational procedures for all co-operatives,

the law gave the Commissioner for Co-operative Development overbearing powers in the

registration and management of co-operatives. Besides giving the Commissioner power

to register, amalgamate and deregister co-operatives, he/she had to approve annual

budgets of co-operatives; authorize borrowing and expenditure; audit their accounts;

monitor financial performance; and could even replace elected co-operative societies’

officials by management commissions at his/her pleasure (Manyara, 2003: 17). All

employment issues in co-operatives fell within the mandate of the Commissioner as

he/she had to approve remuneration, salary or other payments to staff or members as well

as approve the hiring and dismissal of graded staff. Even labor matters in co-operatives

were subject to the discretion of the Commissioner as the Trade Union Act was expressly

excluded from applying to co-operatives.

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Such state control was enhanced by international donors to the cooperative movement

who preferred to work through the government. In the 1966 “Cooperatives (Developing

Countries) Recommendation No. 127”, the ILO called for governments to develop a

comprehensive and planned cooperative development strategy in which one central body

would be the instrument for implementing a policy of aid and encouragement to

cooperatives. Subsequently, donors to the cooperative movement in Kenya, like the

Nordic cooperative movements as well as the American and Canadian credit union

movements, linked up with the cooperative sector through the government’s ministry of

cooperative development.

The evolving partnership between the state and cooperatives saw these organizations

given special privileges and advantages that bordered on monopolistic positions in

economic activities. Though the government set up statutory marketing boards to manage

the marketing of cash crops like coffee, cotton and pyrethrum, the state made

cooperatives the sole agents of these boards. Cooperatives were to buy the produce from

farmers and process it for delivery to the boards before the latter could export it. Such a

monopolistic position saw cooperative leaders ignore the membership as it became the

responsibility of the farmers to join cooperatives if they were to sell their produce.

Moreover, state- and donor-sponsored agricultural credit schemes were also administered

through cooperatives, which became another incentive for farmers to join cooperatives.

Though this partnership between the state and cooperatives resulted into tremendous

growth of the sector in terms of membership and number of cooperatives, the movement

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lost its voluntary and bottom-up character that would have put the members in charge of

their organizations. Cooperatives ceased to reach out to the members as it was up to the

members to join the organizations. In return, member’ morale to participate in the

management of cooperatives declined, with some of them considering cooperatives not to

be their organizations but part of the government. It, therefore, became necessary that the

government enhances supervision over the activities of cooperatives if they were to be

managed prudently and serve the interests of the state. Nevertheless, the rapid expansion

of the sector far outstripped the capacity of government cooperative officers to effectively

manage the supervisory work. The then practice of cooperatives being guided by illiterate

committee members did not help either, for the supervision of technical operations was

beyond their capabilities. In that way, floodgates for nepotism, corruption, patronage,

mismanagement and financial indiscipline were opened (Hussi et al., 1993).

This state of affairs did not help to improve the financial status of cooperatives. As

government agents, these organizations were always subject to administratively imposed

price controls to the extent that they could not realize sufficient returns or profits from

their operations. In the meantime, the subsidies that cooperatives received from the state

and other donors saw their members and leaders develop a highly opportunistic and

passive attitude that compromised their financial contributions to the cooperatives. Their

share capital or membership fee payments were minimal or completely nonexistent. This

led to undercapitalization of the cooperatives, with a dependence on external funding.

Political patronage further eroded the autonomy and economic rationale of the

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cooperatives (Holmen, 1990). This, together with the profit constraints, led to widespread

inefficiencies, mismanagement and irregularities in the sector.

By the end of the 1980s, cooperative development in Kenya had been effectively arrested

by the state, such that these organizations could hardly survive without state and donor

support. A member-based, member-controlled and self-reliant co-operative movement

guided by internationally acclaimed cooperative principles and ideals had disappeared.

Members’ participation and control had significantly reduced (Republic of Kenya, 1997a:

10). Administrative regulations imposed by the Co-operative Societies Rules impaired

the flexibility required for running co-operatives as business enterprises (Hussi et al,

1993: 35). As the country plunged into the era of economic liberalization in the early

1990s, many observers and analysts feared that cooperatives would not withstand the

market competition as then constituted (Hussi et al, 1993; Porvali, 1993; Birgegaard &

Genberg, 1994). To understand such fears, it is necessary that we look into the content of

the liberalization measures that were introduced in the cooperative movement.

LIBERALIZATION OF THE COOPERATIVE MOVEMENT IN KENYA

Economic liberalization that followed the implementation of Structural Adjustment

Programs (SAPs) from the mid 1980s heralded a new economic environment by the early

1990s, which required government withdrawal from the co-operative sector. To this end,

the government published Sessional Paper No. 6 of 1997 on “Co-operatives in a

Liberalized Economic Environment” to provide the new policy framework for the

necessary reforms. The role of the government was redefined from control to regulatory

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and facilitative in nature. The main duties of the Ministry of Co-operative Development

were confined to (a) registration and liquidation of co-operative societies; (b)

enforcement of the Co-operative Societies Act; (c) formulation of co-operative policy; (d)

advisory and creation of conducive environment for co-operative growth and

development; (e) registration of co-operative audits; and (f) carrying out of inquiries,

investigations and inspections (Republic of Kenya, 1997a: 11). The aim of this new

policy outlook was to make co-operatives autonomous, self-reliant, self-controlled and

commercially viable institutions. The monopoly of co-operatives in the agricultural sector

was to be reduced, with the result that co-operatives were now to compete with other

private enterprises on the market. The ICA co-operative principles of voluntary and open

membership; democratic member control; member-economic participation; autonomy

and independence; education, training and information; co-operation among co-

operatives; and concern for community were formally incorporated in the policy.

This new policy obviously required significant changes in the legal framework of co-

operative development. Consequently, the 1966 Co-operative Societies Act was repealed

and replaced by the Co-operative Societies Act, No. 12 of 1997. Like Sessional Paper No.

6 of 1997, the new Co-operative Societies Act served to reduce the involvement of the

government in the day-to-day management of co-operatives. A very liberal law, it granted

co-operatives “internal self-rule” from the previous state controls by transferring the

management duties in co-operatives from the Commissioner for Co-operative

Development to the members through their duly elected management committees

(Manyara, 2004: 37). Co-operatives were no longer required to seek the permission of the

Commissioner to invest, spend or borrow. They were now free to borrow against part or

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the whole of their properties if their by-laws allowed, provided the annual general

meeting approved such borrowing. Like other business entities, co-operatives were

mandated to hire and fire graded staff without the Commissioner’s consent (Republic of

Kenya, 1997b).

Though this reform was a welcome move in the development of an autonomous, self-

managed and sustainable co-operative movement, many are the co-operatives that had not

been adequately prepared for the new era. The sector was left without a regulatory

mechanism to play the role that the government had previously played. Consequently, the

immediate impact on most co-operatives was mainly negative. The newly acquired

freedom was dangerously abused by elected leaders to the detriment of many co-

operative societies. Cases of corruption; gross mismanagement by officials; theft of co-

operative resources; split of viable co-operatives into small uneconomic units; failure by

employers to surrender members’ deposits to co-operatives (particularly SACCOs);

failure to hold elections in co-operatives; favoritism in hiring and dismissal of staff;

refusal by co-operative officials to vacate office after being duly voted out; conflict of

interest among co-operative officials; endless litigations; unauthorized co-operative

investments; and illegal payments to the management committees were increasingly

reported in many co-operatives (Manyara, 2004: 42-43).

However, there were some exceptions to this trend. Some of the co-operatives made

commendable gains from the liberalization. For instance, Githunguri Dairy Farmers Co-

operative Society in Kiambu district benefited from a focused and well-intentioned

management committee that took office in 1999 to use the new freedom to turn around

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the performance of the Society. With the power to hire and fire staff, the committee hired

professional staff to steer the day-to-day management of the co-operative. It also used the

power to borrow and charge the society’s property to get a loan of about 70 million

Kenya shillings (about US$. 1,000,000) from OIKO Credit of the Netherlands to put up a

dairy processing plant in 2003, which saw a tremendous turn around in the fortunes of the

co-operative. This could not have been easily done under the previous state control. A

similar pattern was also reported in Limuru Dairy Farmers Co-operative Society in the

same district.

Nevertheless, the general negative immediate impact of liberalization on the majority of

the co-operatives compelled the government to intervene with a new legal framework.

The Co-operative Societies Act of 1997 was amended through the Co-operative Societies

(Amendment) Act of 2004. The main content of the amended Act was to enforce state

regulation of the co-operative movement through the Commissioner for Co-operative

Development. The power of the Commissioner over co-operatives was significantly

increased relative to what was provided in the 1997 Act. For instance, the Commissioner

got power to approve a list of auditors from which co-operatives could appoint their

auditors at the annual general meeting; he/she could convene a special general meeting of

a co-operative as well as chair and direct the matters to be discussed; the Commissioner

could suspend from duty any management committee member charged in a court of law

with an offence involving fraud or dishonesty pending the determination of the matter;

he/she could dissolve the management committee of a co-operative that, in his/her

opinion, is not performing its duties properly and appoint an interim committee for a

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period not exceeding ninety days; the Commissioner could call for elections in any c-

operative society; he/she could attend meetings of co-operatives and require every co-

operative to send to him/her, at a proper time, notice and agenda of every meeting and all

minutes and communications of the meeting; and the Commissioner could also require

that co-operatives update their by-laws (Republic of Kenya, 2004a).

Most of these provisions should, however, be understood in the context of the

mismanagement of some co-operatives that followed the liberalization of the movement.

Furthermore, the intention of the 2004 Amendment Act was to make provisions for ILO’s

Recommendation 193 of 2002. The recommendation required the government to play the

role of creating policy and legal framework for the development of co-operatives;

improving the growth and development of co-operatives by providing the requisite

services for their organization, registration, operation, advancement and dissolution; and

developing partnership in the co-operative sector through consultation with co-operators

on policies, legislation and regulation. Thus, the recommendation required that the

government be brought back in cooperative development.

Nevertheless, registration of co-operatives continues to be the main role of the

Commissioner for Co-operative Development in the new era. The requirements and

procedure for registering co-operatives have been spelt out in the revised Co-operative

Societies Rules of 2004, which also outlines the operational procedures of all co-

operative societies in the country. The question that we should now turn to is the impact

of these measures on the cooperative movement in Kenya.

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THE IMPACT OF LIBERALIZATION ON THE COOPERATIVE MOVEMENT

The liberalization of the cooperative movement saw many observers and analysts fear

that the monopolistic tendencies that had been embedded in the cooperative movement

over the years would not enable cooperatives to withstand the competitive market.

However, these fears seem to have been disapproved by some cooperatives over the last

decade of the new era of cooperative development.

Growth in Cooperative Number and Membership

Since its inception, the cooperative movement in Kenya has always recorded an increase

in number and membership over the years. This trend seems not to have changed

following the liberalization of the sector in 1997. By 2004, the total number of co-

operatives in Kenya stood at 10, 642. Whereas agricultural co-operatives were the

predominant type up to the early 1990s, non-agricultural co-operatives have since

surpassed the number of agricultural co-operatives. Savings and credit co-operatives

(SACCOs) constitute over 70 per cent of the non-agricultural co-operatives and they have

been more than all agricultural co-operatives since 2003. Table 1 on the next page

illustrates this point by providing a summary of the number of co-operatives in Kenya by

type between 1997 and 2004.

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TABLE 1: NUMBER OF SOCIETIES AND UNIONS BY TYPE, 1997-2004

Type of Society

1997 1998 1999 2000 2001 2002 2003 2004

Agricultural Coffee 279 308 335 366 462 474 487 498 Cotton 78 78 86 86 71 71 59 59 Pyrethrum 65 66 71 73 152 152 140 142 Sugarcane 98 99 108 112 112 112 149 149 Dairy 313 323 331 337 332 332 239 241 Multi-produce 1,342 1,446 1,504 1,560 1,593 1,608 1,794 1,798 Farm purchase 677 698 717 731 624 624 109 109 Fisheries 72 74 79 82 82 84 64 65 Other agricultural 860 915 968 1,002 944 956 1,125 1,154 Total Agricultural 3,784 4,007 4,199 4,349 4,372 4,414 4,166 4,215 Non-Agricultural SACCOs 3,169 3,305 3,538 3,627 3,925 4,020 4,200 4,474 Consumer - 189 194 197 206 208 180 180 Housing - 424 440 468 442 440 229 495 Craftsmen - 73 91 104 102 102 85 86 Transport - 35 36 36 32 32 28 28 Other non-agric. 1,276 551 564 572 600 712 1,316 1,068 Total Non-agric. 4,445 4,577 4,863 5,004 5,307 5,514 6,038 6,331 UNIONS 83 85 89 89 89 89 93 96 GRAND TOTAL 8,312 8669 9,151 9442 9,768 10,017 10,297 10,642 SOURCE: Ministry of Co-operative Development and Marketing, Statistics Unit.

Table 1 shows a general pattern of growth in the number of co-operatives since the

liberalization of the sector, but it ought to be noted that these are cumulative figures that

exist in the register, with some of the co-operatives being dormant. Active co-operatives

were estimated at about 7,000. It was not possible to establish the exact number of active

and dormant co-operatives because the registers in the Ministry are not maintained in that

order. Nevertheless, some crude indicators could serve to illustrate the level of dormancy.

One example is in the cotton sub-sector of the agricultural sector. All cotton co-

operatives, particularly in western Kenya that is the main cotton producing area, have

remained dormant since the virtual collapse of cotton production in the early 1990s,

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partly due to the low producer prices and the poor marketing chain that left farmers not

paid for their produce over long periods of time (Wanyama, 1993). Still in the same

sector, ICA’s study of marketing cooperative societies in 2001 indicates that 31 per cent

of these societies were dormant (ICA, 2002: 7). On the other hand, the government’s

annual returns for the same year indicate that 3, 173 agricultural co-operatives were

active and 1, 075 (representing 25 per cent) were dormant (Republic of Kenya, 2002:

147). With regard to SACCOs, KUSCCO records indicate that 2,600 out of the total

number of 4,474 were active as at 31st December, 2004, implying that 1874 (42 per cent

of the) SACCOs were dormant. If these figures are correct, it can be estimated that about

30 per cent of the cooperatives could be dormant.

With regard to membership, some of our respondents estimated it at about 5 million.

However, statistics at the Ministry of Co-operative Development and Marketing indicate

that co-operatives in Kenya had a total membership of 3,377,000 at the end of 2004, 72

per cent of whom belonged to non-agricultural co-operatives. Once again, SACCOs had

the largest membership among the non-agricultural co-operatives. Out of 2, 453, 000

members of these co-operatives, about 2 million were SACCO members. These figures,

however, include dormant members, whose exact number we could not establish.

Nevertheless, the magnitude can be illustrated by Githunguri Dairy Farmers Co-operative

Society. Out of the cumulative figure of about 12, 000 members that are in the register,

only 6, 000 were reported to be active. The implication is that about 50 per cent of the

members of agricultural co-operatives could be dormant.

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The data nevertheless shows a general decline in the growth of co-operative membership,

particularly in the agricultural sector. For instance, whereas the membership of

agricultural co-operatives was 1, 554, 000 in 2000, it had fallen to 924, 000 in 2004.

SACCOs also suffered a similar fate, though at a lower magnitude. Their membership of

2, 670, 000 in 2000 had fallen to 1, 575, 000 in 2004. Whereas the decline in membership

in agricultural co-operatives could be attributed to the general recession in the

agricultural sector, public and private sector reforms after the liberalization of the

economy that led to the retrenchment of employees saw SACCOs loose their members.

Despite such variations in the slight decline of membership, the overall trend is an

increase in cooperative membership over the years, particularly among SACCOs that are

steadily increasing in number. Indeed, new SACCOs are being formed even among the

self-employed persons in the informal (Jua Kali) and agricultural sectors, which is a

complete departure from the past where these co-operatives were only formed among the

employed persons in the urban areas who could make their share contributions through a

payroll check-off system. To this extent, it can be said that cooperatives have survived

the liberalization measures and are quite alive in Kenya.

The Structural Transformation of the Cooperative Movement

As it may be apparent, vertical integration has been a feature of the co-operative

movement since its inception. Co-operative societies have always been affiliated to

activity-based and district co-operative unions. The latter are then affiliated to national

co-operative organizations, which are members of the apex co-operative organization.

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This vertical structure has seen the evolution of a vibrant co-operative movement over the

years. Nevertheless, the liberalization of the cooperative movement has triggered a

transformation in this structural organization. The inefficient cooperative unions are

increasingly loosing their members, for cooperative societies now have the freedom to

seek better service provision from other organizations or make provision for such

services on their own.

Agricultural co-operative unions have particularly been affected in this regard. For

instance, in the dairy sub-sector, co-operative societies were affiliated to the Kenya Co-

operative Creameries (KCC) that monopolized the processing and marketing of milk up

to the early 1990s. However, KCC’s poor financial performance in the late 1980s and

early 1990s forced it to pay co-operatives, and subsequently the producers, lower milk

prices than the cost of production. This was due to inefficiency in KCC’s collection and

processing operations as well as the political directives regarding prices at which KCC

could sell milk to consumers. The problem of low prices to producers was compounded

by delayed payments by KCC to co-operatives for milk supplied, sometimes taking

several months. This forced producers to shift more sales to the informal raw milk

market, thereby drastically reducing supplies to KCC (Staal et al, 1997: 785; Owango et

al, 1998:174). The persistent poor performance of KCC saw it sold to politically-

connected private investors in 2000 after it failed to pay Kshs. 220 million (about US$.

3,142,857) owed to its employees and a bank loan of Kshs. 400 million (about US$.

5,714,285). Since the mid 1990s, dairy co-operative societies have been functioning

independently without a union. It is in these circumstances that some of them like

22

Githunguri and Limuru dairy co-operative societies have put up their own milk

processing plants. Thus, vertical integration of cooperatives in the dairy sector has

virtually collapsed as cooperative societies now have the freedom to sell their produce to

any willing buyer rather than KCC and some of the societies have put up their own milk

processing plants to offer the services previously provided by KCC.

The coffee sub-sector is also sliding into a similar fate given the poor performance of the

Kenya Planters Co-operative Union (KPCU). Whereas part of the problems in KPCU can

be attributed to the liberalization of the coffee sub-sector in the early 1990s that

introduced new coffee millers and marketing agents to compete with the union as well as

the new coffee central auction system that is long and characterized by delayed payments,

it is poor management that seems to be the key problem. For instance, KPCU is owed

Kshs. 2 billion (about US$. 28,571,428) by politicians, businessmen and large plantation

owners - some of whom are the main competitors to the union. This debt has seen KPCU

unable to pay farmers promptly for their produce. It is this delayed payment that is

triggering some co-operatives affiliated to the union to market their coffee through

private agents, thereby denying the union income and vibrancy. The situation for KPCU

is likely to worsen when the proposed direct marketing system is introduced, for more

players will enter the market to pay farmers cash on delivery of their produce. Co-

operative societies are likely to start operating outside KPCU, as some of them are

already doing, thereby destabilizing the vertical integration of cooperatives in the coffee

sub-sector.

23

It should also be pointed out, at least for the record, that some cooperative unions in the

agricultural sector have simply faded away on account of farmers abandoning the

production of certain crops mainly due to the poor marketing chain. Without the said

produce, agricultural marketing cooperative societies and unions would subsequently

have no business. The point has already been made in this regard that the decline in the

production of cotton in the late 1980s has seen most of the co-operative societies in this

sector remain dormant. The unions have had no option but to fade away. For instance,

Luanda Cotton Farmers Co-operative Union in Busia district had to close down its

ginnery that had just been rehabilitated in 1992 following the collapse of cotton

production, thereby breaking down the vertical integration of cooperatives in the cotton

sub-sector.

Nevertheless, non-agricultural co-operative unions have remained vibrant, particularly

those in the financial sector, and have subsequently maintained the vertical structure of

the cooperative movement. For instance, KUSCCO brings together 2,600 active SACCO

societies with a membership of over two million while KERUSSU has 45 active rural

SACCO societies with a membership of 1,430,390. These unions serve as the mouth-

pieces of the respective SACCOs in the country; a role that continue to see these unions

attract rather than loose membership. KUSCCO also provides common shared services

like education and training; business development, consultancy and research; risk

management; and the inter-lending program for SACCOs called Central Finance

Program. It is these services that have attracted SACCOs to remain loyal members of

KUSCCO, making it the largest SACCO movement in Sub-Saharan Africa (Evans, 2002:

24

13). The implication of vertical integration in the SACCO movement as compared to the

evidence from the agricultural sector is that cooperative societies are only maintaining

their membership in the cooperative unions that provide the services that the societies

yearn for. This is largely happening due to the freedom that liberalization has afforded

cooperative societies relative to the era of state control.

Vertical integration of cooperatives at the apex level also seems to be disintegrating,

partly due to the liberalization of the movement. KNFC was formed in 1964 to promote

co-operative development; unite the co-operative movement; and represent co-operative

interests on all matters of policy and legislation. Its over-riding role was to be the

spokesman of the co-operative movement in Kenya. However, poor management over the

years saw it deviate from its core business into other activities like education and training

as well as research and consultancy that were already being performed by some of its

members. The liberalization of the co-operative sector worsened matters for the falling

giant as cooperative unions had the opportunity to seek services like printing stationary,

auditing, education and training that KNFC used to provide from alternative private

organizations that are more efficient.

In the meantime, corruption and ethnicity became the main driving forces in the election

of the board of directors at KNFC. Such a board would then appoint incompetent chief

executives with the intension of looting the organization. Cooperative unions and other

members were obviously dissatisfied with this turn of events and opted out of the apex

federation. The Minister for Co-operative Development and Marketing responded to the

25

situation in May 2005 by dissolving KNFC’s board of directors following an inquiry

report that implicated the executive director in corruption and gross mismanagement. By

that time, its membership had shrunk from over 8,000 to just over 600. The institution

was bankrupt and could not pay its workers. Property and printing equipment worth

millions of shillings had been vandalized and others stolen. The organization had even

failed to pay its membership fees to ICA.

Currently, most of the cooperative organizations are functioning without reference to the

apex organization. The role of spokesperson and representative of the cooperative

movement is increasingly being played by national cooperative organizations and

cooperative unions. For instance, KUSCCO now stands out as the mouth-piece and

advocate of SACCOs in all matters that affect the development and growth of these

cooperatives. In the recent past, it was vocal in opposing the retrenchment of employees

as that would affect the membership of SACCOs. Even more significantly, KUSCCO

was recently involved in the formulation of the yet to be debated and enacted SACCO

Act that sets out to make special provisions for the registration and licensing of SACCOs;

prudential requirements; standard forms of accounts; co-operate governance;

amalgamations, divisions and liquidations; establishment of a SACCO Regulatory

Authority; savings protection insurance; and setting up a Central Liquidity Fund, among

others. In the circumstances, the collapse of the vertical organization of the cooperative

movement in the country is increasingly becoming evident.

26

Though the horizontal integration of the co-operative movement has not been as

pronounced as vertical integration, it has also been affected by the liberalization of the

sector. This form of integration has found expression through NCOs, which carry out

specialized and investment functions for the entire co-operative movement. One example

is the Co-operative Insurance Company. Initially started as an insurance agency to secure

insurance cover for co-operatives in 1972, it was formally licensed as a composite

company in 1980 to provide risk protection to co-operative properties like vehicles,

factories and buildings as well as SACCO savings in the event of deceased loanees. With

the liberalization of the sector, CIC now offers its services not only to cooperatives, but

also to private organizations and individuals. Though it is currently wholly owned by

1,495 co-operative organizations, which have put in more than Kshs. 200 million (about

US$. 2,857,142) as share capital, the likelihood is that other private actors may become

shareholders in the near future.

The other example of horizontal integration is the Co-operative Bank of Kenya. Started in

1968 for purposes of mobilizing savings to offer banking services and affordable credit to

the co-operative movement, the bank initially restricted shareholding to co-operatives

only. However, with the liberalization of the economy, the bank opened shareholding to

individual members of co-operative societies duly recommended by their societies in

1996. It has, however, retained its association with the co-operative movement by

restricting 70 per cent of the shares to co-operatives while individual members of

societies hold only 30 per cent of the shares and are not entitled to attend the annual

general meeting of the bank. This has helped to keep out private shareholders who might

27

have bought out the bank as has been the case in other African countries. Nevertheless,

since the liberalization of the co-operative movement, the bank has been striving to

modernize its services to effectively compete with other banks and financial institutions

in order to increase its profitability. For instance, in 2004 the bank made a pre-tax profit

of Kshs.365 million (about US$. 5,214,285), up from Kshs.183.4 million (about US$.

2,620,000) in 2003. By September 2005, the bank had recorded a commendable pre-tax

profit of Kshs.608 million (about US$. 8,685,714) – the highest profit ever since its

establishment. This drive for profitability in the competitive financial market may see the

bank offer more shares to individuals and private companies, which may completely

transform its structural organization.

The Performance of the Cooperative Movement

There are variations with regard to the performance of co-operatives in the country since

the liberalization of the sector. Whereas the performance of agricultural co-operatives has

generally been on the decline since 2000, that of non-agricultural co-operatives,

especially SACCOs, has been on the rise. Using turnover (income) as an indicator of co-

operative performance, Table 2 below illustrates this point.

28

TABLE 2: TOTAL TURNOVER OF SOCIETIES AND UNIONS, 1998-2004 (Kenya Shillings, Millions; 1 US$ = 70 Kshs)

Co-operative Type

1998 1999 2000 2001 2002 2003 2004

Coffee 7,188 7,661 7,741 6,928 2,976 2,538 2,492 Cotton 5 5 5 3.8 3.2 1.0 1.0 Pyrethrum 128 129 129 122 122 114 102 Sugarcane 332 340 345 344 341 218 209 Dairy 1,501 1,530 1,529 1,268 1,325 1,290 1,400 Multi-produce 126 128 129 225 226 83 84 Farm purchase 58 59 60 60 60 0.5 5 Fisheries 5 6 7 7 6 522 339 Other Agricultural 288 288 292 296 296 239 256 Total Agricultural 9,631 10,146 10,237 9,254 5,355 5,005 4,888 SACCOs 3,381 3,386 3,389 4,882 4,886 8,261 8,359 Consumer 8 9 9 8 8 2 4 Housing 7 8 8 8 10 54 47 Craftsmen 40 42 43 42 43 158 144 Transport 25 26 26 25 24 2 3 Other Non-agric. 52 54 56 56 57 27 32 Total Non-agric. 3,515 3,527 3,533 5,023 5,030 8,504 8,589 UNIONS 197 198 269 389 389 963 983 GRAND TOTAL 13,343 13,871 14,039 14,666 10,774 13,509 13,477 SOURCE: Ministry of Co-operative Development and Marketing, Statistics Unit. Table 2 shows that the performance of agricultural co-operatives, with the exception of

dairy co-operatives, has generally shrunk to the extent that the turnover of SACCOs in

2004 almost doubled the combined income of all agricultural co-operatives. That

SACCOs are the prime movers of the co-operative sector is illustrated by the fact that

their turnover in 2004 constituted 62 per cent of the total turnover of all co-operatives in

the country. This is partly due to the mushrooming of SACCOs in the formal wage

employment sector, which stands out as the most vibrant in the country rather than the

agricultural marketing co-operatives that were dominant up to the end of the 1980s. Data

in Table 3 of the ten leading SACCOs (in terms of annual turnover) in 2005 serve to

demonstrate their vibrancy.

29

TABLE 3: TOP TEN SACCOs IN ANNUAL TURNOVER, 2005

Name of SACCO

Membership Number of Staff

Annual Turnover (in Kshs; 1 US$ =

70 Kshs) Mwalimu SACCO Ltd. 44, 400 219 711, 562, 812 Harambee SACCO Ltd. 84, 920 235 514, 276, 669 Afya SACCO Ltd. 44, 879 283 483, 599, 495 Ukulima SACCO Ltd. 35, 048 138 284, 707, 899 Kenya Bankers SACCO Ltd. 14, 800 54 246, 000, 000 Stima SACCO Ltd. 14, 789 38 235, 500, 000 Gusii Mwalimu SACCO Ltd. 13, 042 48 219, 506, 484 Kenya Police SACCO Ltd. 6, 575 74 156, 790, 546 UNEP SACCO Ltd. 2, 501 7 148, 790, 782 Teleposta SACCO Ltd. 16, 319 58 146, 638, 556

SOURCE: Annual Reports of the SACCOs

The vibrancy of SACCOs is further illustrated by the fact that their financial strength has

enabled them to replace agricultural marketing co-operatives as the leading shareholders

in the Co-operative Bank of Kenya – the fourth largest bank in Kenya. With proper

management and leadership integrity, SACCOs stand a higher chance of sustainability for

two reasons that have dogged agricultural co-operatives. First, they largely rely on their

own financial resources to transact their activities; thereby avoiding the pitfall of

dependency. Secondly, being in the financial sector, their services will always remain on

demand unlike agricultural co-operatives that are dependent on the performance of the

agricultural sector. Indeed, the increasing decline of agricultural co-operatives has to do

with the recession in the said sector since the late 1980s, which has seen a sharp drop in

the production of certain crops like cotton, pyrethrum and to some extent coffee.

Nevertheless, the relative poor performance of agricultural cooperatives could also be

attributed to the liberalization of the co-operative sector without adequately preparing the

30

co-operatives. The relative better performance of Githunguri Dairy Farmers Cooperative

Society may validate this point. This cooperative was formed in 1961, with a membership

of 31, through state initiatives to help milk producers market their produce. Like other

dairy cooperatives, its initial activity was to collect milk from members and sell to KCC.

The problems that bedeviled KCC in the era of state control, which we have already

referred to, affected the performance of this cooperative to the extent that some of the

members abandoned dairy farming altogether. However, the liberalization of the sector

turned around the fortunes of Githunguri Dairy Farmers Cooperative Society. With the

freedom to sell its milk to any willing buyer, it started exploring alternative markets to

KCC. The resultant increased profitability encouraged officials to explore the possibility

of constructing its own milk processing plant. In 2003, the management committee used

the power to borrow and charge the society’s property to get a loan of about 70 million

Kenya shillings (about US$. 1,000,000) from OIKO Credit of the Netherlands to put up a

modern dairy processing plant, which was completed in 2004.

Since then, the cooperative collects and processes about 80,000 liters of milk daily, up

from 25,000 liters in 1999. It has eighteen vehicles for transporting milk from 41

collection centers in Githunguri Division of Kiambu district to its plant in Githunguri

town. The plant produces four main branded products that are sold in Nairobi namely,

packed fresh milk, yoghurt, ghee and butter. Besides this activity, the co-operative also

provides productive services to its members. These include artificial insemination;

extension services; and animal feeds in its 31 stores that straddle its area of operation.

These services are availed to members on credit that is recovered from the sale of their

31

milk. These activities have seen tremendous improvement in milk production by

members, to which the co-operative has responded by offering competitive prices and

promptly paying for members’ produce to further motivate them. The turnover of the co-

operative in 2005 was over one billion Kenya shillings (about US$. 14,285,714), with a

share capital of over 100 million Kenya shillings (about US$. 1,428,571).

The expansive activities of the co-operative are taken care of by a staff of about 300

employees that are recruited on the basis of an employment policy. Whereas the lower

cadre staff is recruited from within the Division, management staff is sought nationally

and appointed on the basis of professional qualifications. It is significant that unionisable

employees have formed a trade union, which has entered a collective bargaining

agreement (CBA) with the co-operative. This is increasingly enabling the co-operative to

attract and retain staff relative to the era of state control when there was no employment

policy, but the discretion of the Commissioner of Co-operative Development. The

cooperative is now well-adapted to the competitive market and is performing better than

it did during the era of state control.

Clearly, liberalization only benefited this cooperative because it had a focused

management committee that prepared the cooperative for the competitive market by

acquiring the modern milk processing plant, without which the cooperative might have

disintegrated with the sale of KCC as many other dairy cooperatives did. The key lesson

that we learn from this cooperative is that liberalization in itself is not bad for the

cooperative movement, but it requires that cooperatives be prepared by equipping them

32

with the facilities that would enable them to effectively compete with private actors in the

market.

CONCLUSION

It has been the purpose in this discussion to highlight the impact of liberalization

measures on the status, structural organization and performance of cooperatives in

Kenya. Evidence from the field suggests that cooperatives have indeed survived the

market forces and continued to grow in number and membership, with non-agricultural

cooperatives recording higher growth in this regard than the agricultural ones. The

market forces have, however, triggered a transformation in the structural organization of

cooperatives in the country. Due to their inability to provide members with competitive

services, state-imposed federative and apex cooperative organizations are increasingly

fading away. To reclaim the services that were previously provided by such federative

and apex organizations, cooperative societies and unions are steadily making their own

arrangements to provide the services to their members. Thus, the indication is that

liberalization has given cooperatives the impetus to re-examine their organizational

formations with a view to reorganizing in their best interest rather than that of the state as

had been the case in the era of state control. It is in this regard that cooperatives are

increasingly diversifying their activities in order to respond to the challenges of the

market as they endeavor to satisfy the interests and demands of their members. Those

cooperatives that have managed to adapt to the new market system are recording better

performance than they did in the past era of state control. Such cooperatives seem to have

reinvented the business wheel that they had lost in the past era when they were

33

prematurely “arrested” by the state. Whereas the future of cooperative development in a

liberalized economic environment seems to be bright, the challenge is how to inculcate

the business virtues in the less-adapted cooperatives in order to spread the benefits of the

“new” mode of cooperation to a wider population in the country.

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